CLARIFICATION ON SERVICE TAX ON REMUNERATION TO DIRECTORS
Vide Notifications 45/2012 and 46/2012 dated 07/08/2012, Service Tax on reverse charge mechanism was imposed on services rendered by directors to companies (i.e. the recepient company has to pay the entire the Service Tax due on remuneration paid / payable to its directors).
Doubts arose among corporates and tax consultants as to whether remunerations to WHOLE TIME DIRECTORS (I.e. Managing Director / Executive Directors) are covered under these notifications
The General Circular No. 23/2012 dated 09/08/2012 issued by Ministry of Corporate Affairsbrings some respite.
Though the above general circular is issued in the context of 'Managerial Remuneration' under the Companies Act, it clarifies a vital issue as under:
"The NON WHOLETIME DIRECTORS of the company are presently NOT COVERED(emphasis) under the exempted list and as such the sitting fee / commission payable to them by the company is liable for Service Tax"
From the above clarification we can draw the following inference:
- · WHOLE TIME DIRECTORS (Managing Director / Executive Directors) fall under the negative / exempted list of Service Tax and
- · Hence remuneration paid / payable to them by the company won't attract Service Tax
The general circular is pasted below. Please acknowledge the receipt and give your valuable comments.
GENERAL CIRCULAR NO
23/2012, Dated: August 9, 2012
Sub: Applicability of Service Tax on commission payable to Non-Whole Time Directors of a company under section 309(4) of the Companies Act, 1956 - approval of Central Government under section 309/310 of the Companies Act-regarding.
The Finance Act 2012 has introduced Service Tax which is applicable to anyone who provides a Service not covered under the negative/exempted list and if the value of annual revenue is more than Rs.10 lakh. The Non-Whole Time Directors of the Company are presently not covered under the exempted list and as such, the sitting fee/commission payable to them by the company is liable to Service Tax.
If such Service Tax is paid by the company, it will be deemed to be a part of remuneration under section 198 of the Act and would accordingly increase the remuneration amount of such Non-Whole Time Directors. This remuneration could then exceed the limit of 1% profit [u/s 309(4)] of the company when the company has a Managing/Whole Time Directors/Managers or. 3% of the profit [u/s 309(4)] of the company if the company does not have a Managing/Whole Time Directors/Managers, as the case may be. As per existing provisions of the Companies Act, 1956, this would require prior approval of Central Government u/s 309 and 310 of the Act.
It has now been decided that any increase in remuneration of Non-Whole Time Director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit [u/s 309(4)] of the company, as the case may be, in the financial year 2012-13.
(L K Trivedi)
Under Secretary to the Govt. of India